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When Warner Bros. Records announced three years ago that it had negotiated a $60 million contract with Madonna that included funding for a record label, the deal raised industry eyebrows.

She was a proven hitmaker, to say nothing of her ability to make news. But what did she know, many asked, about running a business, particularly one as unpredictable as a record label?

Yet Madonna joined a growing list of artists who were handed the reins to their own label, in deals that were designed to be enticements by the major labels to keep their artists happy rather than to create profit centers.

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The track record of such so-called vanity deals has historically been poor, with most labels eventually folding or merely serving as the imprint for releases by the stars.

Yet Madonna – aided by her manager Freddy DeMann – has turned her Maverick Records into a record company powerhouse, due in large part to the success of the hard rock band Candlebox and the recent success of newcomer Alanis Morissette, surprising industry insiders and silencing critics.

The deals are often a key part of overtures made by a major label in taking whatever steps are necessary to land an artist or keep happy the ones already on its roster.

Sony handed Michael Jackson a new label, Nation Records, as part of a new multimedia deal; Warner Bros, gave Prince the funding for Paisley Park and Virgin Records gave Paula Abdul her own label as an olive branch in the wake of Virgin’s signing Janet Jackson to a then-record setting recording contract.

“An artist has a successful album, and wants to renegotiate the deal,” said an entertainment attorney with film and music clients. “One of the enticements to signing a new deal can be to offer to fund a label for the artist. If its something they are interested in doing, offering a label can often be a deal closer.”

Typically, an artist receives funding to operate the new label, while the major label acts as a distributor and provides the back office functions of marketing, promotion and publicity.

Most deals also set time frames for a vanity label’s success – usually three years – in which the star’s label must be out of the red, or show signs that profitability is attainable.

No wonder artists often feel vanity labels are ultimately in vain, even while the parent labels typically come out all right.

Prince, for example, inked his highly publicized pact with Warner Bros. Records in 1992, which earned the singer a hefty sum for the startup of Paisley Park Records.

But the deal, which was part of a re-negotiation after the singer threatened to stop recording, permitted Warner Bros, to recoup the money it gave to Paisley out of Prince’s past and future recording revenues.

The deal also gave Paisley five years to become profitable, while Prince’s recording contract with Warner Bros. Records ran until 1999.

Warner is said to have invested more than $25 million -$100 million if you believe the Prince camp – yet the deal did not yield any successes. Warner severed its ties with Paisley Park in 1994, and the artist who likes to be called the Artist Formerly Known as Prince is now the artist formerly known as a hitmaker.

Another high hopes, low results company is Bust It Records, a label formed by M.C. Hammer and funded by Capitol Records.

Execs there hadn’t envisioned Hammer starting his own empire, as he seemingly employed everyone in his family in the new venture, in addition to his 14-act roster. Even worse, they didn’t count on the rapper’s career running out of steam. He is now signed with Giant Records.

And then there’s Michael Jackson, who shuttered his Nation Records banner last year. That label was given to him under the terms of his $1 billion multifaceted deal with Sony. The label, like the similarly monikered film company, never released anything.

After Sony Pictures failed to renew the pact of Nation Films last year and sent its execs packing, the focus shifted to Jackson’s MJJ Records, which charted last year with the soundtrack to “Free Willy.”

MJJ also boasts his current “HIStory: Past, Present & Future, Book I” disc and the debut from R& B group Brownstone. But with all the money invested in MJJ by Sony, most in the industry expected more from the King of Pop.

But, as Madonna and De-Mann have seemingly proven, as important as the artist is at a vanity label, it’s also important to bring in an established record exec to oversee the operation who is familiar with the landmines of the industry and who has strong industry ties.

Madonna’s acumen

Industry mavens are pointing to the success of Maverick Records as indicative of how a vanity deal is supposed to work. Observers credit the label’s success to Madonna’s hands-on approach and her business acumen. The label is said to have been in the black during its second year, an unusual feat, but not entirely unheard of.

But Maverick co-CEO De-Mann has earned the respect of industry execs who thought he would be a mere figurehead.

Freddy

Instead, DeMann was recently among a contingent of the town’s A& R execs, in a small club in the Southeast until the wee hours, vying for the services of rockers Marilyn Manson.

The group ultimately opted for a different label, Nothing Records.

“But the image of Freddy slugging it out with 26 year-old A& R guys from other labels for the next superstar, demonstrates how serious he is about Maverick’s success,” said a rival label captain. “Freddy is proof that being successful is the best revenge.”

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